Page 563 - The Principle of Economics

size of the changes to the $20 billion of extra
government borrowing.
c. How does the elasticity of supply of loanable
funds affect the size of these changes? (Hint: See
Chapter 5 to review the definition of elasticity.)
d. How does the elasticity of demand for loanable
funds affect the size of these changes?
e. Suppose households believe that greater
government borrowing today implies higher taxes to pay off the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does it increase or decrease the effects you discussed in parts
(a) and (b)?
13. Over the past ten years, new computer technology has enabled firms to reduce substantially the amount of inventories they hold for each dollar of sales. Illustrate the effect of this change on the market for loanable
funds. (Hint: Expenditure on inventories is a type of investment.) What do you think has been the effect on investment in factories and equipment?
14. “Some economists worry that the aging populations of industrial countries are going to start running down their savings just when the investment appetite of emerging economies is growing” (Economist, May 6, 1995). Illustrate the effect of these phenomena on the world market for loanable funds.
15. This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit.
a. Why is it difficult to implement both of these
policies at the same time?
b. What would you need to know about private
saving in order to judge which of these two policies would be a more effective way to raise investment?
CHAPTER 25
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